Norges Bank

Working Paper

Oil price density forecasts: exploring the linkages with stock markets

Author:
Marco J. Lombardi and Francesco Ravazzolo
Series:
Working Paper
Number:
24/2012

Abstract
In the recent years several commentators hinted at an increase of the correlation between equity and commodity prices, and blamed investment in commodity-related products for this. First, this paper investigates such claims by looking at various measures of correlation. Next, we assess to what extent correlations between oil and equity prices can be exploited for asset allocation. We develop a time-varying Bayesian Dynamic Conditional Correlation model for volatilities and correlations and nd that joint modelling of oil and equity prices produces more accurate point and density forecasts for oil which lead to substantial bene ts in portfolio wealth.

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ISSN 1502-8190 (online)

Published 20 December 2012 10:00
Published 20 December 2012 10:00